In Move to ‘Unlimited’ Pricing Model, Cengage Hopes for a Comeback

It’s been about five years since Cengage Learning filed for bankruptcy, stumbling under the weight of shrinking print sales, a rough transition to digital and too much debt. The company reemerged a year later intent on growing its digital offerings and making more strategic acquisitions and partnerships.

Today, the Boston-based textbook giant is posting year-over-year revenue growth, per its latest investor call, and has regained enough confidence to start taking risks again—namely a new on-demand service for digital learning materials, called Cengage Unlimited, that gives students access to the complete collection of the company’s online textbooks for about $120 a semester (or $180 a year).

At the recent ASU+GSV Summit in San Diego, EdSurge caught up with Cengage CEO Michael Hansen to capture his thoughts about the (un)affordability of course materials, faculty concerns about digital texts and what the company is looking for in its next acquisition. The interview below has been condensed and edited for clarity.

EdSurge: Before we talk about the new service, can you explain what spurred the creation of an unlimited model?

Hansen: Well, if we step back and look at the digital transformation of the traditional textbook space, the prevailing hypothesis was that digital is the better learning experience, and therefore we should invest heavily in digital features and functionalities to convince faculty and students that this is the better product. But I do think that we have somewhat conveniently forgotten that for a large number of students out there, the promise of a better learning experience with digital is closely tied to the question of affordability.

The reality is that there are millions of students out there who are making very painful trade offs in the purchase of learning materials relative to paying the rent, paying for basic needs, food, etc. We as an industry have chosen for a long time to basically ignore that—or have more or less been paying lip service to them.

So the introduction of Cengage Unlimited is pivotal because it says that, yes, digital is the better learning experience, but it has to come at a price that is affordable to the vast majority—if not all—the students in today’s ecosystem. Faculty have asked us over the years whether we care about the cost of learning materials. The proof will be whether they are willing to actually make a decision based on that and switch from one provider to another based on the fact that we now have a vastly superior value proposition.

How are you characterizing a ‘vastly superior’ proposition?

Let me put some numbers around it. The average student today spends around $500 to $570 per year on acquiring learning materials. To get to that number, they need to spend about a week negotiating: Can I get something as rental? Can I get something used? Can I push out the decision further? If they wanted to actually have all of the materials that they need readily on day one, they would pay north of $1,200—and $1,200 on an annual basis for the average student in the United States is an extraordinary amount of money.

So we deliberately made that pivot to affordability and high-quality learning, and said it's not just the one versus the other. It's both packaged together. That's why we believe it addresses a major concern in the marketplace.

How do you think it might impact your bottom line, though? I'm thinking you could sell a single book for $120 and now you're giving unlimited access for $120 total.

So we have, as you will imagine, modeled this out very carefully. We have made certain assumptions, but it's very clear we have made a bet and a bet always entails a certain amount of risk. Essentially what the bet rests on is, on the one hand, you're recapturing students who have been using our materials but have not given us any revenue. These are students that went out and said, ‘I'm going to try to find a PDF online,’ which many of them can do very quickly. No revenue for us. These are students that are buying a used book from another student. No revenue for us. These are students that were in rental programs, and now we are renting to them ourselves. So we are recapturing what we have called the ‘white space,’ meaning students using our content without creating revenue for us.

The other bet is that we will be taking market share from other publishers.

Do you have a ballpark figure for what your current market share is amongst U.S. higher ed institutions?

Our U.S. market shares are slightly north of 20 percent. But importantly, within that 20 percent, think about all the conceivable courses that a student in a higher ed institution can take. We have coverage for more than 99 percent of those courses. We're not focused just on the hard side or the soft side or one discipline or several disciplines. We have the breath of the portfolio, which allows us to model how to get more share in other areas because we have product there.

It used to be the case that startups would look to publishers as a viable exit strategy, in that they hoped to get acquired. Where does Cengage fit in as far as acquisitions go?

Over the last 10 years or so, the majority of the acquisition activity for smaller edtech startups came from the big textbook companies. The textbook company would realize it was under a lot of pressure in regard to enrollment and the digital transformation and conclude that it should buy some companies that looked great from a growth perspective, plug them into the system and scale. That was more or less the hypothesis.

I think what was missing is the question of whether a particular acquisition was really adding to the core value proposition of the publisher. It was more a diversification play in my mind. But now that we have built an ecosystem of millions of subscribers, it is much easier to filter out which edtech startups actually add value to that ecosystem. So if an edtech startup is focused on enhancing the learning experience for students and faculty, that's the sweet spot that we're focused on.

It's not like we leave you out there, you do your own thing and hopefully you continue to grow. I think that approach typically fails because A) the founder typically cashes out, ghosts or something else, or B) stays in the company and growth slows. Typically, they grow very well when they're in startup mode. Then they become part of this big behemoth, and all of a sudden they plateau and they're flattened out. I think Pearson has seen it. Then they become more of a distraction.

But with the introduction of Cengage Unlimited, we're actually opening up to more potential acquisitions down the road.

Tell me a little bit about some of your recent partnerships with companies such as Chegg. What’s your strategy behind partnerships?

The partnership comes back to the premise that I mentioned earlier about building an ecosystem of millions of students. Chegg provides, amongst other things, tutoring services. A student that is in our ecosystem and takes one, two, three Cengage courses often gets to the point in their course where they say, ‘Jesus. On this particular content, I would love to have somebody give me two hours of tutoring.’

For me, I don't want to necessarily be in the tutoring brokerage business. I think Chegg is doing well in that. So, therefore, we're partnering with them. If there's another business that I think we should actually be in, then we would consider that acquisition.

Earlier you talked about getting faculty to switch providers. How do you win over faculty? Do you have a dedicated team?

We have 675 people in the field right now. It's not a small team. It's a huge number of what we call ‘learning consultants,’ or sales reps. They go, build relationships with faculty, explain to them the model and explain the content. Faculty is very, very concerned about high-quality content. The second thing they're concerned about is affordability.

Faculty still want that individual freedom to teach what they want, and the beauty of unlimited is we're giving them that freedom. For introduction to psychology, we have 12 different books. I mean, I'm not a psychologist, but I can tell you there are not 12 different ways to teach introduction to psychology.

It's not unlimited choice in the sense we don't have Pearson materials. We don't have McGraw Hill materials, but we have enough choice. Much like Netflix doesn't have every conceivable movie, but they have movies that matter to most people, and they create their own original content as well. So it's a very operable comparison.

We're seeing that this creates a real network effect. If you're teaching introduction to psychology and I’m teaching introduction to accounting, I never have any reason to talk to you because our disciplines are so different. But now if you come to me and say, ‘Look, I just adopted Cengage. If you adopt Cengage, the overlap in our freshman course, is about 60 percent. So if you adopt Cengage, 60 percent of your students pay no additional cost for their learning materials.’ So we're seeing a real viral effect on campuses: Faculty talking to each other.

Financially, would you say Cengage has maybe turned a corner from the bankruptcy years?

We have been through this digital transition from the time literally that we exited bankruptcy. I think we have seen the continued very robust growth of digital coupled with the continuous decline of print, but print now is relatively speaking a much smaller part of the base. Right now we are starting to turn the corner where digital growth will outweigh the print decline. The company continues to be very profitable. Not as profitable as it was in the heydays of high-priced textbooks, etc. But we are turning the corner toward revenue growth, at which point the profitability is going to turn as well.

It’s been about five years since Cengage Learning filed for bankruptcy, stumbling under the weight of shrinking print sales, a rough transition to digital and too much debt. The company reemerged a year later intent on growing its digital offerings and making more strategic acquisitions and partnerships.

Today, the Boston-based textbook giant is posting year-over-year revenue growth, per its latest investor call, and has regained enough confidence to start taking risks again—namely a new on-demand service for digital learning materials, called Cengage Unlimited, that gives students access to the complete collection of the company’s online textbooks for about $120 a semester (or $180 a year).

At the recent ASU+GSV Summit in San Diego, EdSurge caught up with Cengage CEO Michael Hansen to capture his thoughts about the (un)affordability of course materials, faculty concerns about digital texts and what the company is looking for in its next acquisition. The interview below has been condensed and edited for clarity.

EdSurge: Before we talk about the new service, can you explain what spurred the creation of an unlimited model?

Hansen: Well, if we step back and look at the digital transformation of the traditional textbook space, the prevailing hypothesis was that digital is the better learning experience, and therefore we should invest heavily in digital features and functionalities to convince faculty and students that this is the better product. But I do think that we have somewhat conveniently forgotten that for a large number of students out there, the promise of a better learning experience with digital is closely tied to the question of affordability.

The reality is that there are millions of students out there who are making very painful trade offs in the purchase of learning materials relative to paying the rent, paying for basic needs, food, etc. We as an industry have chosen for a long time to basically ignore that—or have more or less been paying lip service to them.

So the introduction of Cengage Unlimited is pivotal because it says that, yes, digital is the better learning experience, but it has to come at a price that is affordable to the vast majority—if not all—the students in today’s ecosystem. Faculty have asked us over the years whether we care about the cost of learning materials. The proof will be whether they are willing to actually make a decision based on that and switch from one provider to another based on the fact that we now have a vastly superior value proposition.

How are you characterizing a ‘vastly superior’ proposition?

Let me put some numbers around it. The average student today spends around $500 to $570 per year on acquiring learning materials. To get to that number, they need to spend about a week negotiating: Can I get something as rental? Can I get something used? Can I push out the decision further? If they wanted to actually have all of the materials that they need readily on day one, they would pay north of $1,200—and $1,200 on an annual basis for the average student in the United States is an extraordinary amount of money.

So we deliberately made that pivot to affordability and high-quality learning, and said it's not just the one versus the other. It's both packaged together. That's why we believe it addresses a major concern in the marketplace.

How do you think it might impact your bottom line, though? I'm thinking you could sell a single book for $120 and now you're giving unlimited access for $120 total.

So we have, as you will imagine, modeled this out very carefully. We have made certain assumptions, but it's very clear we have made a bet and a bet always entails a certain amount of risk. Essentially what the bet rests on is, on the one hand, you're recapturing students who have been using our materials but have not given us any revenue. These are students that went out and said, ‘I'm going to try to find a PDF online,’ which many of them can do very quickly. No revenue for us. These are students that are buying a used book from another student. No revenue for us. These are students that were in rental programs, and now we are renting to them ourselves. So we are recapturing what we have called the ‘white space,’ meaning students using our content without creating revenue for us.

The other bet is that we will be taking market share from other publishers.

Do you have a ballpark figure for what your current market share is amongst U.S. higher ed institutions?

Our U.S. market shares are slightly north of 20 percent. But importantly, within that 20 percent, think about all the conceivable courses that a student in a higher ed institution can take. We have coverage for more than 99 percent of those courses. We're not focused just on the hard side or the soft side or one discipline or several disciplines. We have the breath of the portfolio, which allows us to model how to get more share in other areas because we have product there.

It used to be the case that startups would look to publishers as a viable exit strategy, in that they hoped to get acquired. Where does Cengage fit in as far as acquisitions go?

Over the last 10 years or so, the majority of the acquisition activity for smaller edtech startups came from the big textbook companies. The textbook company would realize it was under a lot of pressure in regard to enrollment and the digital transformation and conclude that it should buy some companies that looked great from a growth perspective, plug them into the system and scale. That was more or less the hypothesis.

I think what was missing is the question of whether a particular acquisition was really adding to the core value proposition of the publisher. It was more a diversification play in my mind. But now that we have built an ecosystem of millions of subscribers, it is much easier to filter out which edtech startups actually add value to that ecosystem. So if an edtech startup is focused on enhancing the learning experience for students and faculty, that's the sweet spot that we're focused on.

It's not like we leave you out there, you do your own thing and hopefully you continue to grow. I think that approach typically fails because A) the founder typically cashes out, ghosts or something else, or B) stays in the company and growth slows. Typically, they grow very well when they're in startup mode. Then they become part of this big behemoth, and all of a sudden they plateau and they're flattened out. I think Pearson has seen it. Then they become more of a distraction.

But with the introduction of Cengage Unlimited, we're actually opening up to more potential acquisitions down the road.

Tell me a little bit about some of your recent partnerships with companies such as Chegg. What’s your strategy behind partnerships?

The partnership comes back to the premise that I mentioned earlier about building an ecosystem of millions of students. Chegg provides, amongst other things, tutoring services. A student that is in our ecosystem and takes one, two, three Cengage courses often gets to the point in their course where they say, ‘Jesus. On this particular content, I would love to have somebody give me two hours of tutoring.’

For me, I don't want to necessarily be in the tutoring brokerage business. I think Chegg is doing well in that. So, therefore, we're partnering with them. If there's another business that I think we should actually be in, then we would consider that acquisition.

Earlier you talked about getting faculty to switch providers. How do you win over faculty? Do you have a dedicated team?

We have 675 people in the field right now. It's not a small team. It's a huge number of what we call ‘learning consultants,’ or sales reps. They go, build relationships with faculty, explain to them the model and explain the content. Faculty is very, very concerned about high-quality content. The second thing they're concerned about is affordability.

Faculty still want that individual freedom to teach what they want, and the beauty of unlimited is we're giving them that freedom. For introduction to psychology, we have 12 different books. I mean, I'm not a psychologist, but I can tell you there are not 12 different ways to teach introduction to psychology.

It's not unlimited choice in the sense we don't have Pearson materials. We don't have McGraw Hill materials, but we have enough choice. Much like Netflix doesn't have every conceivable movie, but they have movies that matter to most people, and they create their own original content as well. So it's a very operable comparison.

We're seeing that this creates a real network effect. If you're teaching introduction to psychology and I’m teaching introduction to accounting, I never have any reason to talk to you because our disciplines are so different. But now if you come to me and say, ‘Look, I just adopted Cengage. If you adopt Cengage, the overlap in our freshman course, is about 60 percent. So if you adopt Cengage, 60 percent of your students pay no additional cost for their learning materials.’ So we're seeing a real viral effect on campuses: Faculty talking to each other.

Financially, would you say Cengage has maybe turned a corner from the bankruptcy years?

We have been through this digital transition from the time literally that we exited bankruptcy. I think we have seen the continued very robust growth of digital coupled with the continuous decline of print, but print now is relatively speaking a much smaller part of the base. Right now we are starting to turn the corner where digital growth will outweigh the print decline. The company continues to be very profitable. Not as profitable as it was in the heydays of high-priced textbooks, etc. But we are turning the corner toward revenue growth, at which point the profitability is going to turn as well.